UEM Sunrise’s third property venture in Melbourne

UEM Sunrise Bhd (Aug 5, 96 sen)

Maintain buy with an unchanged target price of RM1.20: UEM Sunrise Bhd (UEMS) announced that it had bought a 21-storey office tower (with the size of 16,000 sqm or 172,222 sq ft) in Melbourne, Australia. The company plans to convert the building into a luxurious residential development.

We gather that the office tower is located at 412 St Kilda Road, which is one of the main routes into the Melbourne Central Business District (CBD). Note that this is the company’s third property acquisition in Melbourne, after the purchases of two CBD sites in LaTrobe Street and Mackenzie Street in October 2013.

We gather that UEMS plans to convert the building into ultra-luxurious residential, potentially with a mix of ground-floor retail and serviced apartment components. Rationale for the purchase is to ensure a steady flow of overseas projects. The property is in a different location from the two core CBD sites currently owned by UEMS.

Valuation works out to be A$337 (RM960.67) per sq ft. We gather that the average valuation for transactions in the past 12 months is at A$350 per sq ft for Melbourne commercial buildings. This means the deal’s valuation is 3.7% lower than the past 12-month average and this could be due to the need to convert the building. Hence, we think that the price is fair.

The company has not provided the gross development value estimate and the timing of the launch. However, we think that it will take between one and two years before the launch, based on the previous two projects developed by UEMS in Melbourne.

We maintain our “buy” recommendation on UEMS as we believe that Khazanah Nasional Bhd may be inclined to privatise UEMS due to its deep valuation currently. In our view, the market may have overreacted negatively on the stock.

Note that UEMS’ share price has tumbled 69% from its peak of RM3.10 on July 18, 2013, while we expect the core earnings per share to only decline by 28% to 9.7 sen for financial year 2015 (FY15), against the 13.39 sen for FY13. It is also at a 30% discount to its book value of RM1.40.

We also like the management’s initiative to diversify its land bank from Johor, via the Melbourne acquisitions. — MIDF Research, Aug 5

This article first appeared in the digitaledge Daily, on Aug 6, 2015.